Basic Theory of Financial Accounting PDF

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Practical Approch to
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44 Practical Approch to Theory of Accounting 1
Suspense Account
CHAPTER
CA. Naresh -1
Aggarwal’s
When debit and credit side of trial balance does not tally (agree) and it is difficult
to locate the mistakes before preparing the final accounts, the difference in the
trial balance is transferred to newly opened imaginary and temporary account
ACADEMY of
Basics of ACCOUNTS
Accounting
called ‘Suspense Account’. Suspense account is prepared to avoid the delay in

When a person starts a business, whether large or small, his main aim is to earn
the preparation of final accounts. If the total of debit balances of the trial balance West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
profit. He receives money from certain sources like sale of goods, interest on bank
exceeds the total credit balances, the difference is transferred to the credit side of
deposits etc. He has to spend money on certain items like purchase of goods,
the suspense account. On the other hand, if the total credit balances of the trial
salary, advertisement etc. These activities take place during the normal course of
balance exceeds the total debit balances the difference is transferred to the debit
his business. He would naturally be curious at the year end, to know the progress
side of the suspense account.
of his business. The number of business transactions are generally too large, that
When the errors affecting the suspense account are located, they are rectified it is not possible to recall his memory as to how the money had been earned and
with suspense account. Suspense account is continued in the books until the spent. But if he had noted down these transactions as and when they were occurred,
errors are located and rectified. Such balance will be shown in the balance he can readily get the required information. Hence, the details of the business
sheet. Debit balance will be shown on the asset side and the credit balance will transactions have to be recorded in a clear and systematic manner to get answers
be shown on the liability side. easily and accurately for the following questions at any time he likes :
When all the errors affecting the trial balance are located and rectified, the (i) What is the Net Profit or Loss of the business ?
suspense account automatically gets closed.
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(ii) What are the value of Assets, Liabilities and Capital of the business concern?
(iii) How much money is used in different type of expenses and money earned
from different type of incomes
(iv) How much amount is to be receive from customers to whom goods have been
sold on credit ?
•••••••••••••••••••••• (v) How much amount is to be paid to suppliers on account of credit purchases?
These and several other questions can be very easily answered with the help of
accounting.
Book-keeping
The need for recording business transactions in a clear and systematic manner is
the basis which gives rise to Book-keeping.
Book-keeping is that branch of knowledge which tells us how to keep a record of
business transactions. It is often routine and clerical in nature. Only those
transactions which are related to the business and which can be expressed in
terms of money are recorded. The activities of book-keeping include recording in
the journal, posting to the ledger and balancing of accounts. R.N. Carter says,
“Book-keeping is the science and art of correctly recording in the books of account
all those business transactions that result in the transfer of money or money’s
worth”.
Objectives of book-keeping
The objectives of book-keeping are as follows :
(i) to have permanent record of all the business transactions.
2 Practical Approch to Theory of Accounting Practice in Accountancy 43
(ii) to keep records of income and expenses in such a way that the net profit or net
loss may be calculated. CA. Naresh Aggarwal’s
(iii) to keep records of assets and liabilities in such a way that the financial position
of the business may be ascertained.
ACADEMY of ACCOUNTS
(iv) to know the names of the customers and the amount due from them.
(v) to know the names of suppliers and the amount due to them.
(vi) to have important information for legal and tax purposes.
Rs.4,500, while carrying forward the balance to the next page it was
recorded as Rs.5,400.
Advantages of book-keeping
(iii) Compensating Errors : The errors arising from excess debits or under
From the above objectives of book-keeping, the following advantages can be
debits of accounts being neutralised by the excess credits or under credits
noted :
to the same extent of same or some other account is compensating error.
(i) Permanent and Reliable Record : Book-keeping provides permanent record Since the errors in one direction are compensated by errors in another
for all business transactions, replacing the memory which fails to remember direction, arithmetical accuracy of the trial balance is not at all affected
everything. inspite of such errors. For example, If the purchases book and sales
(ii) Arithmetical Accuracy of the Accounts : With the help of book keeping trial book are both overcast (excess totalling) by Rs.1,000, the errors mutually
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balance can be easily prepared. This is used to check the arithmetical accuracy compensate each other. This error will not affect the agreement of trial
of accounts. balance.
(iii) Net Result of Business Operations : It helps in ascertaining the result (Profit or
Loss) of the business correctly. Errors disclosed and not disclosed by trial balance
(iv) Ascertainment of Financial Position : It is not enough to know the profit or loss; If the impact of the errors on trial balance is considered, errors may be classified
the proprietor should have a full knowlage of his financial position in business into two categories – (i) Errors disclosed by trial balance, (ii) Errors not disclosed
which includes Assets, Liabilities and Capital values. Once the full information by trial balance.
is known, this helps him to plan for the next year’s business. ERRORS
(v) Ascertainment of the Progress of Business : When a proprietor prepares
financial statements evey year, he will be in a position to compare the
statements. This will enable him to ascertain the growth of his business. Thus
book keeping enables a long range planning of business activities besides Disclosed by Trial Balance Not disclosed by Trial Balance
satisfying the short term objective of calculation of annual profits or losses. (i) Errors of partial omission (i) Errors of complete omission
(vi) Control over Assets : In the course of business, the proprietor acquires various (ii) Errors of casting (ii) Errors of recording
assets like building, machines, furnitures, etc. He has to keep a check over (iii) Errors of carrying forward (iii) Errors of principle
them and find out their values year after year. (iv) Errors of posting in the wrong side (iv) Errors of posting to wrong A/c
(v) Errors of posting with wrong amount (v) Compensating Errors
(vii) Identifying Do’s and Don’ts : Book keeping enables the proprietor to make an
(vi) Double posting in the same A/c
intelligent and periodic analysis of various aspects of the business such as
purchases, sales, expenditures and incomes. From such analysis, it will be
possible to focus his attention on what should be done and what should not Rectification of Errors
be done to enhance his profit earning capacity. Correction of errors in the books of accounts is not done by erasing, rewriting or
(viii) Fixing the Selling Price : In fixing the selling price, the businessmen have to striking the figures which are incorrect. Correcting the errors that has occured is
consider many aspects of accounting information such as cost of production, called Rectification. Appropriate entry is passed or suitable explanatory note is
cost of purchases and other expenses. Accounting information is essential in written in the respective account or accounts to neutralise the effect of errors.
determining selling prices.
because the purchases book is meant for recording credit purchases of goods
meant for resale and not fixed assets. A trial balance will not disclose errors CA. Naresh Aggarwal’s
of principle.
(2) Clerical Errors : These errors arise because of mistakes committed in the
ACADEMY of ACCOUNTS
ordinary course of accounting work. These can be further classified into three
types as follows : West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
(i) Errors of Omission : This error arises when a transaction is completely
or partially omitted to be recorded in the books of accounts. Errors of (ix) Taxation : Businessmen pay sales tax, income tax, etc. The tax authorities require
omission may be classified as below : them to submit their accounts. For this purpose, they have to maintain a record
(a) Error of Complete Omission : This error arises when a transaction is of all their business transactions.
totally omitted to be recorded in the books of accounts. For example, (x) Management Decision-making : Planning, reviewing, revising, controlling and
Goods purchased from Ram completely omitted to be recorded. This decision-making functions of the management are well helped by book-
error does not affect the trial balance. keeping records and reports.
(b) Error of Partial Omission : This error arises when only one aspect of (xi) Legal Requirements : Claims against and for the firm in relation to outsiders
the transaction either debit or credit is recorded. For example, a can be confirmed and established by producing the records as evidence in
credit sale of goods to Ravi recorded in sales book but omitted to be the court.
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posted in his A/c. This error affects the trial balance.
(ii) Errors of Commission : This error arises due to wrong recording, wrong Accounting
posting, wrong casting, wrong balancing, wrong carrying forward etc.
Book-keeping does not present a clear financial picture of the state of affairs of a
Errors of commission may be classified as follows :
business. When one has to make a judgement regarding the financial position of
(a) Error of Recording : This error arises when a transaction is wrongly the firm, the information contained in these books of accounts has to be analysed
recorded in the books of original entry. For example, Goods of and interpreted. This is the main purpose of accounting.
Rs.2,500, purchased on credit from Sunil, is recorded in the book for
Accounting is the process of recording business transactions in a systematic
Rs.1,500. This error does not affect the trial balance.
manner, in term of money and analysing the results thereof. Accounting is needed
(b) Error of Posting : This error arises when information recorded in the to maintain records of all money related transaction of an organisation in a very
books of original entry are wrongly entered in the ledger. Error of systematic way. According to American Institute of Certified Public Accountants
posting may be as follows : “Accounting is the art of recording, classifying and summarising in a significant
(i) Amount posted in wrong account. manner and in terms of money, transactions and events which are, in part at least,
(ii) Amount posted in wrong side. of a financial character, and interpreting results thereof.
(iii) Wrong amount posted Accounting is considered as a system which collects and processes financial
information of a business. These informations are reported to the users to enable
This error may or may not affect the trial balance which depends on
them to make appropriate decisions.
the type of error committed.
(c) Error of Casting (Totalling) : This error arises when a mistake is
committed while totalling the subsidiary book or account. For Objectives of Accounting
example, If correct total of an account is Rs.10,000 but it may be The main objectives of accounting are as follows
wrongly totalled as Rs.9,000. This is called overcasting. If it is wrongly (i) to maintain accounting records.
totalled as Rs.9,000, it is called undercasting. (ii) to calculate the result of operations.
(d) Error of Carrying Forward : This error arises when a mistake is (iii) to ascertain the financial position.
committed in carrying forward a total of one page to the next page. (iv) to communicate the information to users
For example, Total of purchase book in page 122 of the ledger was
Accounting Process
The process of accounting as per the above definition is given below:
Limitations of Trail Balance
ACADEMY of ACCOUNTS
Though the trial balance helps to ensure the arithmetical accuracy of the books of
Input   Output  accounts, it is possible only when the accountant Financial
Process Accounting • Costing • Taxation • has not committed any error. As
Management
all the errors made are not disclosed by the trial balance, it would not be regarded
Identifying as West Patel Nagar,
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proof Ph:8800215448.
correctness of the Website:
books ofwww.academyofaccounts.org
accounts maintained.
Recording
Business  Classifying  Information Errors in Accounting
transactions Summarising to
The fundamental principle of the double-entry system is that every debit has a
(monetary value) Analysing Users
corresponding credit of equal amount and vice-versa. Therefore, the total of all
Interpreting
debit balances in different accounts must be equal to the total of all credit balances
Communicating in different accounts, i.e., the total of the two columns should tally (agree).
The tallying of the two totals (debit balances and credit balances) of the trial
In order to accomplish its final objective of communicating information to the users, balance ensures only arithmetic accuracy but not accounting accuracy. If however,
accounting embraces the following functions. the two totals do not tally, it implies that some errors have been committed while
(i) Identifying : Identifying the business transactions from the source documents. recording the transactions in the books of accounts.
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(ii) Recording : The next function of accounting is to keep a systematic record of
all business transactions, which are identified in an orderly manner, soon after Types of Errors
their occurrence in the journal or subsidiary books. Keeping in view the nature of errors, all the errors committed in the accounting
(iii) Classifying : This is concerned with the classification of the recorded business process can be mainly classified into two types: (i) Errors of Principal, (ii) Clerical
transactions so as to group the transactions of similar type at one place. i.e., in Errors
ledger accounts. In order to verify the arithmetical accuracy of the accounts,
trial balance is prepared.
Types of Errors
(iv) Summarising : The classified information available from the trial balance are
used to prepare profit and loss account and balance sheet in a manner useful
to the users of accounting information. Errors of Principle Clerical Errors
(v) Analysing : It establishes the relationship between the items of the profit and
loss account and the balance sheet. The purpose of analysing is to identify the
financial strength and weakness of the business. It provides the basis for Errors of Errors of Compensating
interpretation. Omission Commission Errors
(vi) Interpreting : It is concerned with explaining the meaning and significance of i. Partial omission i. Error of recording
the relationship so established by the analysis. Interpretation should be useful
ii. Complete omission ii. Error of posting
to the users, so as to enable them to take correct decisions.
iii. Error of casting
(vii) Communicating : The results obtained from the summarised, analysed and
interpreted information are communicated to the interested parties. iv. Error of carrying forward
Accounting Cycle (1) Errors of Principle : Transactions are recorded as per generally accepted
accounting principles. If any of these principles is violated or ignored, errors
An accounting cycle is a complete sequence of accounting process, that begins
resulting from such violation are known as errors of principle. For example,
with the recording of business transactions and ends with the preparation of final
Purchase of assets recorded in the purchases book. It is an error of principle,
accounts. The flow of activites in accounting cycle is given below :
40 Practice in Accountancy 5
CHAPTER - 6
Trial Balance and Rectification of Errors
ACADEMY of ACCOUNTS
After recording and classifing the transactions in the various accounts along with Accounting • Costing • Taxation • Financial Management
balancing thereof. The next step in the accounting process is to prepare a statement West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
to check the arithmetical accuracy of the transactions recorded so for. This
statement is called ‘Trial Balance’.
Trial balance is a statement which shows debit balances and credit balances of
Transactions  Journal  Ledger  Trial Balance
all accounts in the ledger. Since, every debit should have a corresponding credit
as per the rules of double entry system, the total of the debit balances and credit
balances should tally (agree). In case, there is a difference, one has to check the  (Next Year) 
correctness of the balances brought forward from the respective accounts. Trial
balance can be prepared in any date provided accounts are balanced. Balance Sheet  Profit & Loss Account  Trading Account
Objectives of Trial Balance When a businessman starts his business activities, he records the day-to-day
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The objectives of preparing a trial balance are : transactions in the Journal. From the journal the transactions move further to the
(i) To check the arithmetical accuracy of the ledger accounts. ledger where accounts are written up. Here, the combined effect of debit and credit
(ii) To locate the errors. pertaining to each account is arrived at in the form of balances.
(iii) To facilitate the preparation of final accounts. To prove the accuracy of the work done, these balances are transferred to a
statement called trial balance. Preparation of trading and profit and loss account is
Advantages of Trial Balance the next step. The balancing of profit and loss account gives the net result (profit or
loss) of the business transactions. To know the financial position of the business
The advantages of the trial balance are :
concern balance sheet is prepared at the end.
(i) It helps to ascertain the arithmetical accuracy of the book-keeping work done
These transactions which have completed the current accounting year, once again
during the period.
come to the starting point – the journal – and they move with new transactions of
(ii) It supplies in one place ready reference of all the balances of the ledger the next year. Thus, this cyclic movement of the transactions through the books of
accounts. accounts (accounting cycle) is a continuous process.
(iii) If any error is found out by preparing a trial balance, the same can be rectified
before preparing final accounts.
Accountancy, Accounting and Book-keeping
(iv) It is the basis on which final accounts are prepared.
Accountancy refers to a systematic knowledge of accounting. It explains “why to
do” and “how to do” of various aspects of accounting. It tells us why and how to
Methods of preparing Trial Balance prepare the books of accounts and how to summarize the accounting information
A trial balance can be prepared in the following methods. and communicate it to the interested parties.
(i) The Total Method : According to this method, the total amount of the debit Accounting refers to the actual process of preparing and presenting the accounts.
side of the ledger accounts and the total amount of the credit side of the In other words, it is the art of putting the academic knowledge of accountancy into
ledger accounts are recorded. practice.
(ii) The Balance Method : In this method, only the balances of an account either Book-keeping is a part of accounting and is concerned with record keeping or
debit or credit, as the case may be, are recorded against their respective maintenance of books of accounts. It is often routine and clerical in nature.
accounts. This method is more widely used, as it supplies ready figures for
preparing the final accounts.
Relationship between Accountancy, Accounting and Book-keeping

Book-keeping provides the basis for accounting and it is complementary to
accounting process. Accounting begins where book-keeping ends. Accountancy
includes accounting and book-keeping. This relationship can be easily understood
ACADEMY of ACCOUNTS
with the help of the following diagram.
Accountancy
(ii) Some debtors might have directly paid into bank.
(iii) Bank credits interest on the credit balance of the customer’s account.
Accounting
(iv) The banker has wrongly credited this account instead of some other
account.
Book Keeping In all the above cases, the entry will be first entered in the pass book. The
customer will know this only after he verifies the entries in the pass book. So
there may be a time gap of some days before the customer includes entries
made in the pass book.
(4) Amounts debited by the banker in the pass book without the immediate
Distinction between Book-keeping and Accounting
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knowledge of the customer : The following are some of the examples for this.
In general the following are the differences between book-keeping and accounting.
(i) The banker has recorded bank charges, interest on overdraft etc.
No. Basis Book-keeping Accounting
(ii) The banker has paid insurance premium, subscription for
1. Scope Recording and maintenance It is not only recording and periodicals,etc.on behalf of the customer as per the standing instructions.
of books of accounts. maintenance of books of (iii) The banker has wrongly debited this account instead of some other
accounts but also includes account.
analysis, interpreting and
(iv) The banker has paid the bills payable of the customer as per standing
communicating the
instructions .
information.
(v) Dishonour of a cheque deposited and discounted bills receivable
2. Stage Primary stage. Secondary stage.
In all the above cases, the entry will be first entered in the pass book of the
3. Objective To maintain systematic To ascertain the net result
customer. And the customer will know only after he verifies the entries in the
records of business of the business operation.
pass book or statement of account . So there may be a time gap of some days
transactions.
before the customer includes the entries made in the pass book.
4. Nature Often routine and clerical Analytical and executive
in nature. in nature.
5. Responsibility Book-keeper is responsible An accountant is also
for recording business responsible for the work of
transactions. a book-keeper.
6. Supervision The book-keeper does not An accountant supervises
supervise and check the and checks the work of the
work of an Accountant. book-keeper.
7. Staff involved Work is done by the junior Senior staff performs the
staff of the organisation. accounting work.
date of issuing the only on the date on which they

cheque to the creditors. are presented and paid. CA. Naresh Aggarwal’s
(6) Collections and
payments as per
Entered in the Cash
book after seeing the
Entered in the Pass book
first.
ACADEMY of ACCOUNTS
standing instructions pass book.
(7) Balancing It is balanced at the end It is balanced after each West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
of a specified period. transaction.
Users of Accounting Information
Causes of disagreement between the balance shown by the cash book and The basic objective of accounting is to provide information which is useful for
the balance shown by the pass book persons and groups inside and outside the organisation.
(1) Cheques paid / deposited into bank but not yet collected : The cheques paid I. Internal users: Internal users are those individuals or groups who are within
into bank for collection but not credited into the account of the customer, the organisation like owners, management, employees and trade unions.
because the cheque is II. External users: External users are those individuals or groups who are outside
(i) not collected and credited till that date (most common). the organisation like creditors, investors, banks and other lending institutions,
(ii) collected but the bank staff has forgotten to make entry. present and potential investors, Government, tax authorities, regulatory agencies
(iii) collected but credited to wrong account. and researchers.
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(iv) dishonoured.
As soon as the cheques are sent to the bank, entries are made in the debit Users of Accounting Information
side of the cash book (bank column). But, usually bank credit the customers
account only when they have received payment from the bank concerned, in
other words, when the cheques have been collected. Hence, there will be a
time gap between the depositing of the cheques and the collection by the Internal Users External Users
bank.
(2) Cheques issued but not yet presented for payment : The cheques issued but
Owners Management Employees and
not debited customers account may be because the cheque is
Trade unions
(i) not cashed till date.
(ii) not presented till date.
(iii) presened but dishonoured for some reasons or other.
Creditors, Banks, Present Potential Govt. and Regulatory Researchers
(iv) lost by the party to whom the cheque was issued.
Money Lenders Investors Investors Tax Authorities Agencies
(v) debited to wrong account.
In all of the above cases, the entry in the cash book is made immediately on
the issue of cheque but naturally the entry will be made by bank only when The users and their need for information are as follows:
the cheque is presented for payment. Thus there will be a gap of some days Internal Users Need for Information
between the entry for issue of cheque in the cash book and the entry for (a) Owners To know the profitability and financial soundness of the
payment made in the pass book. business.
(3) Amount credited by the banker in the pass book without the immediate (b) Management To take prompt decisions to manage the business
knowledge of the customer : The following are some of the examples for the efficiently.
above statement
(c) Employees and To form judgement about the earning capacity of the
(i) The bank might have collected rent, dividend, bills of exchange, interest Trade unions business since their remuneration and bonus depend on
etc., due for the customer as per standing instructions . it.
External Users
(a) Creditors, banks, To determine whether the principal and the interest thereof
money lenders will be paid in when due. ACADEMY of ACCOUNTS
(b) Present investors To know the position, progress and prosperity of the
business in order to ensure the safety of their investment.
(c) Potential investors To decide whether to invest in the business or not.
Pass Book or Bank Statement
(d) Government and To know the earnings in order to assess the tax liabilities
Pass Book (Bank Statement) is merely a copy of the customer’s account in the
Tax authorities of the business.
books of a bank. It shows all the deposits, withdrawals and the balance available
(e) Regulatory To evaluate the business operation under the regulatory in the customers account. Banker credits the account of the customer for all the
agencies legislation. amounts received from the customer and on his behalf. Similarly the banker
(f) Researchers To use in their research work. debits the account of the customer for all withdrawals and amounts paid to others
on behalf of the customers.
Branches of Accounting The main point to be remembered is that entries are made only after cash is
received or paid, except in the case of interest and bank charges. Interest and
Increased scale of business operations has made the management function more
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bank charges are mere book adjustments and in these, there are neither receipt
complex. This has given raise to specialised branches in accounting. The main
of cash nor payment of cash.
branches of accounting are Financial Accounting, Cost Accounting and
Management Accounting.
Bank Overdraft
Branches of Accounting Bank overdraft is an amount drawn over and above the actual balance kept in the
bank account. This facility is available only to the current account holders. Interest
will be charged for the amount overdrawn i.e., overdraft. The Cash book will
show a credit balance i.e., unfavourable balance. The pass book will show a
Financial Cost Management debit balance.
Accounting Accounting Accounting
Difference between Cash Book and Pass Book
(1) Financial Accounting : It is concerned with recording of business transactions S.N. Basis Cash Book (Bank Column) Pass Book
in the books of accounts in such a way that operating result of a particular period
(1) Maintained by Cashier Banker
and financial position on a particular date can be known.
(2) Deposits of Cash Entered on the debit Entered on the credit
(2) Cost Accounting : It relates to collection, classification and ascertainment of side of the cash book. column of the pass book.
the cost of production or job undertaken by the firm.
(3) Withdrawals of Entered on the credit Entered on the debit
(3) Management Accounting : It relates to the use of accounting data collected Cash side of the cash book. column of the pass book.
with the help of financial accounting and cost accounting for the purpose of policy
(4) Cheques deposited Entered on the Entered in the pass
formulation, planning, control and decision making by the management.
for collection debit side of the cash book only on the date
book on the date of of the realisation
Basic Accounting Terms depositing the cheques of the cheque.
The understanding of the subject becomes easy when one has the knowledge of into the bank.
a few important terms of accounting. Some of them are explained as follows : (5) Cheques issued Entered on the credit side Entered on the debit
(1) Transactions : Transactions are those activities of a business, which involve of the cash book on the column of the pass book
36 Practice in Accountancy 9
CHAPTER - 5 ACADEMY of ACCOUNTS

Bank Reconciliation Statement Accounting • Costing • Taxation • Financial Management
Normally entries in the cash book should tally (agree) with those in the pass
book and the balances shown by both the books should be the same. But in transfer of money or goods or services between two persons or two accounts. For
practice, the balances generally differ. In case of disagreement in the balance of example, purchase of goods, sale of goods, borrowing from bank, lending of money,
the cash book and the pass book, the need for preparing Bank Reconciliation salaries paid, rent paid, commission received and dividend received.
Statement arises. (2) Proprietor : A person who owns a business is called its proprietor. He contributes
capital to the business with the intention of earning profit.
Bank Reconciliation Statement (3) Capital : It is the amount invested by the proprietor/s in the business. This
The balance of the bank column in cash book represents the customers cash amount is increased by the amount of profits earned and the amount of additional
balance at bank. It should be the same as shown by his bank pass book on any capital introduced. It is decreased by the amount of losses incurred and the amounts
particular day. For every entry made in the cash book if there is a corresponding withdrawn. For example, if Mr.Anand starts business with Rs.5,00,000, his capital
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entry in the pass book (maintained by the banker) or vice versa, the bank balance would be Rs.5,00,000.
will be the same in both the books. (4) Assets : Assets are the properties of every description belonging to the business.
However, the cash book and the pass book are maintained by two different Cash in hand, plant and machinery, furniture and fittings, bank balance, debtors,
parties and hence it is not certain that entry in one book will always have a bills receivable, stock of goods, investments, Goodwill are examples for assets.
corresponding entry in the other. Assets can be classified into tangible and intangible.
Bank reconciliation statement is a list in which the various items that cause a Tangible Assets: These assets are those having physical existence. It can be seen
difference between bank balance as per cash book and pass book on any given and touched. For example, plant & machinery, cash, etc.
date are indicated. Intangible Assets: Intangible assets are those assets having no physical existence
A Bank reconciliation statement is prepared by starting with the balance shown but their possession gives rise to some rights and benefits to the owner. It cannot
by any of the two books. But in actual practice, a Bank reconciliation statement is be seen and touched. Goodwill, patents, trademarks are some of the examples.
prepared by the customer starting with the balance as per cash book and will (5) Liabilities : Liabilities refer to the financial obligations of a business. These
ensure that the balance as per pass book is arrived at. denote the amounts which a business owes to others, e.g., loans from banks or
other persons, creditors for goods supplied, bills payable, outstanding expenses,
Need and Importance of Bank Reconciliation Statement bank overdraft etc.
After tracing the various items of difference, a bank reconciliation statement is (6) Drawings : It is the amount of cash or value of goods withdrawn from the
prepared. The following are its advantages in which lies its importance. business by the proprietor for his personal use. It is deducted from the capital.
(1) The errors that might have taken place in the cash book in connection with (7) Debtors : A person (individual or firm) who receives a benefit without giving
bank transactions can be easily found. money or money’s worth immediately, but liable to pay in future or in due course of
(2) Regular preparation of bank reconciliation statement prevents frauds. time is a debtor. The debtors are shown as an asset in the balance sheet. For
example, Mr. A bought goods on credit from Mr. B for Rs.10,000. Now Mr. A is a
(3) It indirectly imposes moral check on the accounting staff.
debtor to Mr. B till he pays the value of the goods.
(4) By the preparation of bank reconciliation statement, uncredited cheque can
(8) Creditors : A person who gives a benefit without receiving money or money’s
be detected and steps can be taken for their collection.
worth immediately but to claim in future, is a creditor. The creditors are shown as a
liability in the balance sheet. In the above example Mr. B is a creditor to Mr. A till he
receive the value of the goods.
(9) Purchases : Purchases refers to the amount of goods bought by a business for
resale or for use in the production. Goods purchased for cash are called cash CA. Naresh Aggarwal’s
purchases. If it is purchased on credit, it is called as credit purchases. Total
purchases include both cash and credit purchases.
ACADEMY of ACCOUNTS
(10) Purchases Return or Returns Outward : When goods are returned to the
suppliers due to defective quality or not as per the terms of purchase, it is called as West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
purchases return. To find net purchases, purchases return is deducted from the
total purchases.
Cash Discount : Sale of goods on credit is a common phenomenon in any business.
(11) Sales : Sales refers to the amount of goods sold that are already bought or When goods are sold on credit the customers enjoy a facility of making payment on
manufactured by the business. When goods are sold for cash, they are cash sales some date in the future. In order to encourage them to make the payment
but if goods are sold and payment is not received at the time of sale, it is credit immediately or before the expiry of the credit period a deduction is offered. The
sales. Total sales includes both cash and credit sales. deduction so made is known as cash discount. For example, If Ram purchases
(12) Sales Return or Returns Inward : When goods are returned from the customers goods worth Rs.5,000 on 30 days credit then, as per the terms of contract, he is
due to defective quality or not as per the terms of sale, it is called sales return or authorised to make payment 30 days after the date of purchase. If he is offered a
returns inward. To find out net sales, sales return is deducted from total sales. cash discount of 2% on payment within 10 days and if he does so, he is entitled to
(13) Stock : Stock includes goods unsold on a particular date. Stock may be deduct Rs.100 from the invoice price and pay Rs.4,900. In this case Rs.100 is cash
discount. But if he does not choose to make payment within 10 days then he will
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opening and closing stock. The term opening stock means goods unsold in the
beginning of the accounting period. Whereas the term closing stock includes goods not get any cash discount. In this case he will pay Rs.5,000 within 30 days.
unsold at the end of the accounting perid. For example, if 2,000 units purchased @
Rs.10 per unit remain unsold, the closing stock is Rs.20,000. This will be opening Distinction between cash discount and trade discount
stock of the subsequent year.
Trade discount differs from cash discount in the following respects.
(14) Revenue : Revenue means the amount receivable or realised from sale of
S.N. Basis Trade Discount Cash Discount
goods and earnings from interest, dividend, commission, etc.
(1) Purpose It help the trader to earn It encourage prompt
(15) Expense : It is the amount spent in order to produce and sell the goods and
some profit. payment within a specified
services. For example, purchase of raw materials, payment of salaries, wages, etc.
time period.
(16) Income : Income is the difference between revenue and expense.
(2) Time when It is allowed on the It is allowed when payment is
(17) Voucher : It is a written document in support of a transaction. It is a proof that allowed purchase of goods. made within specified period.
a particular transaction had been taken place for the value stated in the voucher. It
(3) Variation It is usually given at the It varies from customer to
may be in the form of cash receipt, invoice, cash memo, bank pay-in-slip etc.
same rate which is customer depending on
Voucher is necessary to audit the accounts.
applicable to all customers the time and period of
(18) Invoice : Invoice is a business document which is prepared when one sell and will vary with the payment.
goods to another. The statement is prepared by the seller of goods. It contains the quantity purchased.
information relating to name and address of the seller and the buyer, the date of
(4) Disclosure It is shown by way of It is not shown in the
sale and the clear description of goods with quantity and price.
deduction in the invoice. invoice.
(19) Receipt : Receipt is an acknowledgement for cash received. It is issued to the
(5) Ledger A/c No separate Account is Separate Accounts are
party paying cash. Receipts form the basis for entries in cash book.
opened in the Ledger. opened in the Ledger for
(20) Account : Account is a summary of relevant business transactions at one discount received and
place relating to a person, asset, expense or revenue named in the heading. An discount allowed.
account is a brief history of financial transactions of a particular person or item. An
account has two sides called debit side and credit side
Such contra entries are denoted by writing the letter ‘C’ in the ‘L.F.’ column, on both
sides of the cash book. They indicate that no posting in respect thereof is necessary CA. Naresh Aggarwal’s
CHAPTER - 2
in the ledger.
Contra Entries
ACADEMY of ACCOUNTSFrame Work of Accounting
West PatelisNagar,
Accounting New Delhi.of
the language Ph:8800215448.
business. It Website:
records www.academyofaccounts.org
business transactions taking
place during the accounting period. Accounting communicates the result of the
Cash deposited into Bank Cash withdrawn for office use business transactions in the form of final accounts. With a view to make the
Bank A/c Dr. Cash A/c Dr. accounting results understood in the same sense by all interested parties, certain
To Cash A/c To Bank A/c accounting assumptions, concepts and principles have been developed over a
course of period.
Imprest System of Petty Cash Book

Imprest means ‘money advanced on loan’. Under this system the amount required Frame Work of Accounting
to meet out various petty expenses is estimated and given to the petty cashier at
the beginning of the specified period, usually a month. All the payments are
supported by vouchers. At the end of the given period or earlier, when the petty Assumptions Concepts Modifying Principles
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cashier has spent the petty cash amount, he closes the petty cash book for the
1. Accounting Entity 1. Dual Aspect 1. Cost Benefit
period and balances it. Then he submits the accounts to the cashier. He verifies
the petty cash book with the vouchers. After satisfying himself as to the correctness 2. Money Measurement 2. Revenue Recognisation 2. Materiality
and genuiness of the payments an amount equal to the cash spent is given to the 3. Accounting Period 3. Historical Cost 3. Consistency
petty cashier. This amount together with the unspent amount will bring up the 4. Going Concern 4. Matching 4. Prudence
cash in hand to the amount with which he originally started i.e., the imprest
5. Full Disclosure
amount. Thus the system of reimbursing the amount spent by the petty cashier at
fixed period, is known as the imprest system of petty cash. 6. Verifiable objective evidence
For example, On June 1, 2002, Rs.1,000 was given to the petty cashier. He had
spent Rs.850 during the month. He will be paid Rs.850 on 30th June by the Basic Assumptions
cashier so that he may again have Rs.1,000 for the next month i.e., July. (1) Accounting Entity or Business Entity Assumption : According to this
assumption, business is considered as a separate unit which is distinct from its
Trade Discount : Trade discount is an allowance or concession granted by the owners, suppliers, customers, managers and others. A business unit should have
seller to the buyer, if the customer purchases goods above a certain quantity or a completely separate set of Books of Accounts. We should have to record every
above a certain amount. This discount is always necessary in case where goods transaction only from the business point of view and not from the owners or any
are sold to a customer who is a trader himself. For example all deals of sale and other persons point of view. Even the proprietor is treated as a creditor / money
purchase between whole sellers and retailers must have a portion of trade discount, lender to the extent of his capital.
as If there is no trade discount then retailer will not be able to earn profit on further (2) Money Measurement Assumption : In accounting, only those business
resale. The amount of the purchase or sale, is always arrived at after deducting the transactions and events which are of financial nature are recorded. For example,
trade discount, ie., only the net amount is considered. For example, if the MRP of a when Sales Manager is not on good terms with Production Manager, the business
product is Rs.5,000 and trade discount granted by manufacturer to the whole is bound to suffer. This fact will not be recorded, because it cannot be measured in
seller is 20% then net price of the product to the wholesaler is Rs.4,000 and by this terms of money.
amount entry will be recored. Trade discount is not recorded in the books. They are (3) Accounting Period Assumption : The users of financial statements need
used only for determining the net price. periodical reports to know the operational result and the financial position of the
business concern. Hence it becomes necessary to close the accounts at regular
intervals. Usually a period of one year is considered as the accounting period.
(4) Going Concern Assumption : As per this assumption, the business will exist
(6) Columnar or Analytical Petty
CA. Cash Book
Naresh : As in the case of any other cash book,
Aggarwal’s
for a long period and transactions are recorded from this point of view. There is
petty cash book also has the debit side and the credit side. The debit side is smaller
neither the intention nor the necessity to wind up the business in the foreseeable
future.
ACADEMY of ACCOUNTS
and has very infrequent entries because cash receipt by the petty cashier is mainly
from the cashier at the
Accounting beginning or close of a specified period.Management
The credit side is
• Costing • Taxation • Financial
bigger and thus has many columns. For each important petty expenses there is a
Basic Concepts of Accounting West Patel
seperate Nagar,and
column, Newtherefore
Delhi. Ph:8800215448.
columnar cashWebsite:
bookwww.academyofaccounts.org
is another name for this petty
These concepts guide how business transactions are reported. On the basis of the cash book. These analytical columns helps to know the actual amount spent on
above four assumptions the following concepts (principles) of accounting have each and every type of petty expenses for the specified period. Each petty payment
been developed. is first entered in the total payments column, and then recorded in the respective
analytical column, so that :
(1) Dual Aspect Concept : Dual aspect principle is the basis for Double Entry
System of book-keeping. All business transactions recorded in accounts have two (i) the total amount spent on each expenses for a particular period can be easily
aspects. It based on the duality nature of the transactions. Every financial transaction ascertained by adding up the respective column.
always has a double effect on the financial position of the enterprise. For example (ii) only the periodical total of each column is posted to the ledger.
if you buy Goods for Rs. 10,000 then it affects twice: first effect is on the cash (iii) the total petty payment for any period can be easily ascertained from the total
balance as it decreases and second effect is that the stock in hand is increased. Or payments column.
if you take a loan from a Bank of Rs.50,000 not only you get an asset in form of cash
The analytical petty cash book may be designed according to the requirements of
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but also a liability that you have to pay the debt. Similarly all the transactions
the business.
always have two aspects. Therefore, in modern accounting system all the
transactions are recorded in two parts one is Debit and other is Credit.
(2) Revenue Recognisation Concept : The revenue recognition principle states Advantages of Analytical Petty Cash Book
that, under the accrual basis of accounting, we should only record revenue when The advantages of analytical petty cash book is given below :
an entity has substantially completed a revenue generation process; thus, we (i) Simple Method : It is a simple method of recording petty expenses. The
record revenue when it has been earned. For example, when an entity sells goods maintenance of petty cash book does not require specialised knowledge of
on credit to its customer, it can recognize the revenue immediately upon completion accounting.
of the sale, even if it does not expect payment from the customer for several days
(ii) Economy of Time : It requires lesser time in recording and also saves the time
or weeks.
of the main cashier.
Also, if an entity receives payment in advance from a customer, then the entity
(iii) Lesser chances of mistakes : The petty cash book is checked by the main
records this payment as a liability, not as revenue. Only after it has completed all
cashier at the end of the specified period. This process minimises the chances
work under the arrangement with the customer can it recognize the payment as
of mistakes.
revenue.
(iv) Frauds can be minimised : Recording transactions on the basis of vouchers
(3) Historical Cost Concept : Under this concept, assets are recorded at the price
and checking of cash book by the main cashier minimises the chances of
paid to acquire them and this cost is the basis for all subsequent accounting for the
fraud.
asset. For example, if a piece of land is purchased for Rs.5,00,000 and its market
value is Rs.8,00,000 at the time of preparing final accounts the land value is
recorded only for Rs.5,00,000. Thus, the balance sheet does not indicate the price Contra Entry
at which the asset could be sold for. When an entry affect both cash and bank accounts it is called a contra entry.
(4) Matching Concept : Matching the revenues earned during an accounting Contra is a Latin word which means opposite. In contra entries both the debit and
period with the cost associated with the same period to ascertain the result of the credit aspects of a transaction are recorded in the cash book itself. Contra entry
business concern is called the matching concept. It is the basis for finding accurate is made when (i) Cash deposited into bank and (ii) Cash withdrawn from bank
profit for a period which can be safely distributed to the owners. for office use. As two cash book with bank columns is a combined cash and bank
(5) Full Disclosure Concept : It involves proper classification and explanations of account, both the aspects of the transaction will be entered in the same book.
(1) Single Column Cash Book : Single column cash book (simple cash book) has
one amount column in each side. All cash receipts are recorded on the debit side CA. Naresh Aggarwal’s
and all cash payments on the credit side. In fact, this book is nothing but a Cash
Account. Hence, there is no need to open cash account in the ledger.
ACADEMY of ACCOUNTS
(2) Two Column Cash Book (with Discount) : The most common two column cash West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
books are : Cash book with discount and cash columns. On either side of the
single column cash book, another column is added to record discount allowed accounting information. Accounting statements should disclose fully and completely
and discount received. In the double column cash book, cash column is balanced all the significant information. On the basis on this, decisions will be taken by
like any other ledger account. But the discount column on each side is merely various interested parties and wrong and incomplete infromation may lead to
totalled. The total of the discount column on the debit side shows the total discount wrong decisions.
allowed to customers and is debited to Discount Allowed A/c. The total of the (6) Verifiable and Objective Evidence Concept : This principle requires that each
discount column on the credit side shows total discount received and is credited recorded business transactions in the books of accounts should have an adequate
to Discount Received A/c. evidence to support it. For example, cash receipt must support the payments made
so that genuineness of the transactions can be established. The documentary
(3) Two Column Cash Book (with Bank) : When bank transactions are more in evidence of transactions should be free from any bias. All accounting records
number, it is advisable to open a cash book by providing a separate column on should based on documentary evidence which are capable of verification.
AoA
either side of the cash book to record the bank transactions therein. In such case,
it is not necessary to open a separate Bank Account in the Ledger because the
Modifying Principles
two columns in the cash book serve the purpose of Cash Account and Bank
Account respectively. It is a combination of Cash Account and Bank Account. To make the accounting information useful to various interested parties, the basic
There are two amount columns on debit side one for cash receipts and the other assumptions and concepts discussed earlier have been modified. These modifying
for bank deposits (i.e., payment made into Bank Account). Similarly there are two principles are as under :
amount columns on the credit side, one for payments in cash and the other for (1) Cost Benefit Principle : This modifying principle states that the cost of applying
payments by cheques respectively. a principle should not be more than the benefit derived from it. If the cost is more
than the benefit then that principle should be modified.
(4) Three Column Cash Book : Large business concerns receive and make (2) Materiality Principle : The materiality principle requires all relatively relevant
payments in cash and by cheques. Where cash discount is a regular feature, a information should be disclosed in the financial statements. Unimportant and
Three Column Cash Book is more advantageous. This cash book has three immaterial information are either left out or merged with other items.
amount columns (cash, bank and discount) on each side. All cash receipts, (3) Consistency Principle : The aim of consistency principle is to preserve the
deposits into bank and discount allowed are recorded on debit side and all cash comparability of financial statements. The rules, practices, concepts and principles
payments, withdrawals from bank and discount received are recorded on credit used in accounting should be continuously observed and applied year after year.
side. The format is given in the next page. Comparisons of financial results of the business among different accounting period
can be significant and meaningful only when consistent practices were followed in
(5) Simple Petty Cash Book : In every business, of whatever size, there are many ascertaining them. For example, depreciation of assets can be provided under
small cash payments such as conveyance, carriage, postage, telegram, etc. These different methods, but whichever method is followed, it should be followed regularly.
expenses are generally repetitive in nature. If all these small payments are
(4) Prudence (Conservatism) Principle : Prudence principle takes into
recorded in the cash book, it will be difficult for the cashier to maintain the records
consideration all prospective losses but leaves all prospective profits. The essence
all by himself. In order to make the task of the cashier easy, these small and
of this principle is “anticipate no profit and provide for all possible losses”. For
recurring expenses are recorded in a separate cash book which looks like an
example, while valuing stock in trade, market price or cost price whichever is less
account is called “Simple Petty Cash Book” and the person who maintains the
is considered.
petty cash is called the ‘Petty Cashier’.
Accounting Standards
Cash Book CA. Naresh Aggarwal’s
To promote world-wide uniformity in published accounts, the International
Accounting Standards Committee (IASC) has been set up in June 1973 with nine
nations as founder members. The purpose of this committee is to formulate and
ACADEMY of ACCOUNTS
In every business there are cash transactions as well as credit transactions. All
credit transactions will become cash transactions when payments are made to
publish in public interest, standards to be observed in the presentation of audited

Accounting
creditors • Costing
or cash received Taxation • Financial Management
from•debtors.
financial statements and to promote their world-wide acceptance and observance. Since,
Westcash
Patel transactions will Ph:8800215448.
Nagar, New Delhi. be numerous, Website:
it is better to keep a separate book to
www.academyofaccounts.org
IASC exist to reduce the differences between different countries’ accounting record only the cash transactions.
practices. This process of harmonisation will make it easier for the users and
preparers of financial statement to operate across international boundaries. In our Features of Cash Book
country, the Institute of Chartered Accountants of India has constituted Accounting A cash book is a special journal which is used to record all cash receipts and
Standard Board (ASB) in 1977. The ASB has been empowered to formulate and cash payments. The cash book is a book of original entry or prime entry since
issue accounting standards, that should be followed by all business concerns in transactions are recorded for the first time from the source documents. The cash
India. book is a ledger in the sense that it is designed in the form of a cash account and
records cash receipts on the debit side and cash payments on the credit side.
Thus, the cash book is both a journal and a ledger. Cash Book will always show
debit balance, as cash payments can never exceed cash available. In short, cash
book is a special journal which is used for recording all cash receipts and cash
AoA
payments.
Advantages of Cash Book

(1) Saves time and labour : When cash transactions are recorded in the journal
a lot of time and labour will be involved. To avoid this all cash transactions
are straight away recorded in the cash book which is in the form of a ledger.
(2) To know cash and bank balance : It helps the proprietor to know the cash and
bank balance at any point of time.
(3) Mistakes and frauds can be prevented : Regular balancing of cash book
reveals the balance of cash in hand. In case the cash book is maintained by
business concern, it can avoid frauds. Discrepancies if any, can be identified
and rectified instantly.
(4) Effective cash management : Cash book provides all information regarding
total receipts and payments of the business concern at a particular period. So
that, effective policy of cash management can be formulated.
Kinds of Cash Book

The various kinds of cash book from the point of view of uses may be as follow:
(i) Single column Cash Book
(ii) Two column Cash Book (with Discount)
(iii) Two column Cash Book (with Bank)
(iv) Three column Cash Book
(v) Simple Petty cash Book
(vi) Columnar or Analytical Petty Cash Book
manner that the work of one person is automatically checked by another person.
With the use of internal check, the possibility of occurrance of errors and frauds CA. Naresh Aggarwal’s
CHAPTER -3
may be avoided.
(iv) Easy Reference : It facilitates easy references to any particular item. For instance
ACADEMY of ACCOUNTS
Origin, Source Documents and Vouchers
total credit sales for a month can be easily obtained from the Sales Book.
Accounting
West Patelprocess starts
Nagar, New with
Delhi. identifying the
Ph:8800215448. transactions
Website: to be recorded in the
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(v) Easy Postings : Posting from the subsidiary books may be made at convenient books of accounts. Accounting identifies only those transactions and events which
intervals depending upon the nature of the business. involve money. They should be of financial character. Accountant does so by
sorting out various cash memos, invoices, bills, receipts and vouchers.
Journal Proper In the accounting process, the first step is the recording of transactions in the books
Journal proper is used for making the original record of such transactions for which of accounts. The origin of a transaction is derived from the source document.
no special journal (subsidiary book) has been kept in the business. The usual
entries that are put through this journal is explained below : Double Entry System
(1) Opening Entries : Opening entries are used at the beginning of every financial Double entry system was introduced to the business world by an Italian merchant
year to open the books by recording the assets, liabilities and capial appearing named Lucas Pacioli in 1494. Though the system has originated in Italy but most
in the balance sheet of the previous year. of the countries now have adopted this system.
(2) Closing Entries : Closing entries are recorded at the end of the accounting year
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There are numerous transactions in a business concern. Each transaction, when
for closing accounts relating to expenses and revenues. These accounts are closely analysed, reveals two aspects. The modern system of accounting is based
closed by transferring the balances to the Trading Account and Profit & Loss on this duality nature of the transactions. Every financial transaction always has a
Account. double effect on the financial position of the enterprise. For example if you buy
(3) Adjustment Entries : To arrive at a correct figure of profits and loss, certain Goods for Rs. 10,000 then it affects twice: first effect is on the cash balance as it
accounts require some adjustments. Entries for making such adjustments are decreases and second effect is that the stock in hand is increased. Or if you take
called as adjusting entries. These are needed at the time of preparing the final a loan from a Bank of Rs.50,000 not only you get an asset in form of cash but also
accounts. Examples are charging depreciation on assets and making provision a liability that you have to pay the debt. Similarly all the transactions always have
for doubtful debts etc. two aspects. Therefore, in modern accounting system all the transactions are
(4) Transfer Entries : Transfer entries are passed in the journal proper for recorded in two parts one is Debit and other is Credit.
transferring an item entered in one account to another account. In short, the basic principle of this system is, for every debit, there must be a
Example: when the proprietor takes goods for his personal use. corresponding credit of equal amount and for every credit, there must be a
(5) Rectification Entries : Rectifying entries are passed for rectifying errors which corresponding debit of equal amount.
have been committed in the book of accounts.
Example : Purchase of furniture was debited to Purchases Account.
Features of Double Entry System
(6) Miscellaneous Entries or Casual Entries : These are entries of casual nature
(i) Every business transaction affects two accounts.
which do not occur so frequently. Such transactions include the following:
(ii) Each transaction has two aspects, i.e., debit and credit.
(i) Credit purchases and credit sale of assets which cannot be recorded
through cash book, purchases book or sales book (iii) It is based upon accounting assumptions concepts and principles.
(ii) Endorsement, renewal and dishonour of bill of exchange which cannot be (iv) Helps in preparing trial balance which is a test of arithmetical accuracy in
recorded through bills book. accounting.
(iii) Other adjustments like interest on capital and loan, outstanding expenses, (v) Preparation of final accounts with the help of trial balance.
bad debts, reserves etc.
Advantages of Double Entry System
The advantages of Double Entry system are as follows:
(i) Scientific system : This is the only scientific system of recording business Transactions
transactions. It helps to attain the objectives of accounting. CA. Naresh Aggarwal’s
(ii) Complete record of transactions : This system maintains a complete record
of all business transactions.
ACADEMY
Day Books Cash Book
of ACCOUNTS
Journal Proper Bills Books
(iii) A check on the accuracy of accounts : By the use of this system the accuracy
of the accounting work can be established by the preparation of trial balance. West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Purchases Sales Purchases Sales Bills Bills
(iv) Ascertainment of profit or loss : The profit earned or loss occured during a Book Book Return Return Receivable Payable
period can be ascertained by the preparation of profit and loss account. Book Book Book Book
(v) Knowledge of the financial position : The financial position of the concern
Purpose of different type of Susbsidiary Books
can be ascertained at the end of each period through the preparation of
balance sheet. (i) Purchases Book : It is also known as Bought Day Book is used to record all
credit purchases of goods which are meant for resale in the business. Cash
(vi) Full details for control : This system permits accounts to be kept in a very
purchases of goods and any kind of purchases of assets (cash or credit) are
detailed form, and thereby provides sufficient informations for the purpose of
not entered in this book.
control.
(ii) Sales Book : It is used to record all credit sales of goods. Cash sales of
(vii) Comparative study : The results of one year may be compared with those of
goods, cash and any kind of sale of assets (cash or credit) are not entered in
previous years and the reasons for change may be ascertained.
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this book.
(viii) Helps in decision making : The mangement may be able to obtain sufficient
(iii) Purchases Return Book : It is also known as Return Outword Book. It records
information for its work, especially for making decisions. Weaknesses can
the goods returned by the trader to the suppliers but money not received. If
be detected and remedial measures may be applied.
money is received then it will go to Cash Book in place of Purchase Return
(ix) Detection of fraud : The systematic and scientific recording of business Book.
transactions on the basis of this system minimises the chances of fraud.
(iv) Sales Return Book : It is aslo known as Retrun Inward Book. It deals with
goods returned by the customers to the trader but money not refunded. If
Accounting Equation money is refunded then it will go to Cash Book in place of Sales Retrun Book.
Accounting equation is based on dual aspect concept. It emphasizes on the fact (v) Bills Receivable Book : It records the receipts of bills (Bills Receivable).
that every transaction has a two sided effect i.e., on the assets and claims on (vi) Bills Payable Book : It records the issue of bills (Bills Payable).
assets. Always the total claims (those of outsiders and of the proprietors) will be equal to
(vii) Cash Book : It is used for recording only cash transactions i.e. all receipts and
the total assets of the business concern. The claims are also known as equities.
all payments of cash or by bank.
(viii) Journal Proper: It is the journal which records the entries which can not be
Assets = Capital + Liabilities entered in any of the above listed subsidiary books.
or
Assets = Equities Advantages of Subsidiary Books
The advantages of maintaining subsidiary books can be summarised as under :
Fixed Assets Current Assets Owner’s Equity Outsider’s Equity (i) Division of Labour : The division of journal, resulting in division of work, ensures
or Capital or Liabilities more clerks working independently in recording original entries in the subsidiary
books.
Account (ii) Efficiency : The division of labour also helps the reduction in work load, saving
Every transaction has two aspects and each aspect has an account. It is stated in time and stationery. It also gives advantages of specialisation leading to
that ‘an account is a summary of relevant transactions at one place relating to a efficiency.
particular head’. (iii) Prevents Errors and Frauds : The accounting work can be divided in such a
(5) Net effect The final position of a The final position of a

particular account can particular account can CA. Naresh Aggarwal’s
not be found. be ascertained just at
a glance.
ACADEMY of ACCOUNTS
(6) Next Stage Entries are transferred to From the Ledger, first
the ledger. the Trial Balance is West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
drawn and then final A/cs
are prepared.
Classification of Accounts
(7) Tax authorities Do not rely upon these Rely on the ledger for
Transactions can be divided into three categories.
assessment purpose.
(1) Transactions relating to properties, goods or cash (Real Accounts)
(2) Transactions relating to expenses or losses and incomes or gains (Nominal
Subsidiary Books
Accounts)
For a business having a large number of transactions it is practically impossible to
(3) Transactions relating to individuals and firms (Personal Accounts)
write all transactions in one journal, because of the following limitations.
Therefore, accounts can also be classified into Personal, Real and Nominal. The
(i) Periodical details of some important business transactions cannot be known,
classification may be illustrated as follows :
from the journal easily, e.g., monthly sales, monthly purchases.
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(ii) Such a system does not facilitate the installation of an internal check system
since the journal can be handled by only one person. Accounts
(iii) The journal becomes bulky and voluminous.
Use of Subsidiary Books Personal Impersonal
Transactions can be classified and grouped conveniently according to their nature,

as some transactions are usually of repetitive in nature. Generally, transactions
are of two types: Cash and Credit. Cash transactions can be grouped in one Natural Artificial Representative Real Nominal
category whereas credit transactions can be grouped in another category. Thus, in
practice, the main journal is sub-divided in such a way that a separate book is used
for each category or group of transactions which are repetitive and sufficiently
large in number. Tangible Intangible Income Expense
Each one of the subsidiary books is a special journal and a book of original or
prime entry. Though the usual type of journal entries are not passed in these sub- (1) Personal Accounts : The accounts which relate to persons. Personal
divided journals, the double entry principles of accounting are strictly followed. accounts include the following.
(i) Natural Persons : Accounts which relate to individuals. For example, Mohan’s
Types of Subsidiary Books A/c, Shyam’s A/c etc.
The number of subsidiary books may vary according to the requirements of each (ii) Artificial persons : Accounts which relate to a group of persons or firms or
business. The following are the special purpose subsidiary books. institutions. For example, Reliance Ltd., HDFC Bank, Life Insurance
Corporation of India, Ramjus Sports Club etc.
(iii) Representative Persons : Accounts which represent a particular person or
group of persons. For example, Outstanding Salary A/c, Prepaid Insurance
A/c, Advance Fees A/c etc.
The business concern may keep business relations with all the above personal
accounts, because of buying goods from them or selling goods to them or borrowing
from them or lending to them. Thus they become either Debtors or Creditors. The CA. Naresh
transactions are finally incorporated in theAggarwal’s
Ledger. The following are the advantages
proprietor being an individual his capital account and his drawings account are also
personal accounts.
ACADEMY of ACCOUNTS
of ledger :
(i) Complete information at a glance : All the transactions pertaining to an account
(2) Impersonal Accounts : All those accounts which are not personal accounts
Accounting
are collected • at Costing
one place •in Taxation
the ledger. •ByFinancial
looking at theManagement
balance of that
are impersonal accounts. This is further divided into two types viz. Real and West Patel Nagar,
account, one canNewunderstand
Delhi. Ph:8800215448. Website:
the collective www.academyofaccounts.org
effect of all such transactions at a
Nominal accounts. glance.
(i) Real Accounts : Accounts relating to properties and assets which are owned (ii) Arithmetical Accuracy : With the help of ledger balances, Trial balance can be
by the business concern are real accounts. Real accounts include tangible prepared to know the arithmetical accuracy of accounts.
and intangible accounts. For example, Land, Building, Goodwill, Purchases, (iii) Result of Business Operations : It facilitates the preparation of final accounts
etc. for ascertaining the operating result and the financial position of the business
(ii) Nominal Accounts : These accounts do not have any existence, form or concern.
shape. They relate to incomes and expenses and gains and losses of a (iv) Accounting information : The data supplied by various ledger accounts are
business concern. For example, Salary Account, Rent Account, Interest summarised, analysed and interpreted for obtaining various accounting
Account, Fees Account etc. information.
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Source Documents Posting
Source documents are the evidences of business transactions which provide The process of transferring the entries recorded in the journal or subsidiary books
information about the nature of the transaction, the date, the amount and the parties to the respective accounts opened in the ledger is called Posting. In otherwords,
involved in it. Transactions are recorded in the books of accounts when they actually posting means grouping of all the transactions relating to a particular account at
take place and are duly supported by source documents. According to the verifiable one place. It is necessary to post all the journal entries into various accounts in the
objective principle of Accounting, each transaction recorded in the books of ledger because posting helps us to know the net effect of various transactions
accounts should have adequate proof to support it. These supporting documents during a given period on a particular account.
are the written and authentic proof of the correctness of the recorded transactions.
These documents are required for audit and tax assessment. They also serve as
the legal evidence in case of a dispute. Bills receivable, bills payable, wage sheet, Distinction between Journal and Ledger :
salaries pay slips, correspondence etc., also serve as the source documents. Books of original entry (Journal) and Ledger can be distinguished as follows:
There must be a source document for each transaction recorded in the books of S.N. Basis Journal Ledger
accounts. The following are the most common source documents. (1) Book It is the book of prime It is the main book of
entry. account.
(1) Invoice / Bill and Cash Memo: When a trader sells goods on credit, he (2) Stage Recording of entries in Recording of entries in
prepares a sale invoice and if he sells goods for cash, he prepares a cash these books is the first the ledger is the
memo . Invoice and Cash-Memo both are similer in pro-forma and contains full stage. second stage.
details relating to the amount, the terms of payment, name and address of the (3) Process The process of recording The process of
seller and buyer etc. The original copy of the sale invoice or cash memo is sent entries in these books is recording entries in the
to the purchaser and its duplicate copy is kept for making records in the books called “Journalising”. ledger is called “Posting”.
of accounts. (4) Transactions Transactions relating to Transactions relating
Similarly, when a trader purchases goods on credit, he receives an Invoice a person or property or to a particular account
from the supplier of goods and if he purchases goods for cash he receives a expense are spread over. are found together on
Cash-Memo from the supplier of goods. a particular page.
‘Assets = Liabilities + Capital’. The accounting equation is a statement of equality

between the debits and the credits. The rules of debit and credit depend on the CA. Naresh Aggarwal’s
nature of an account. For the purpose of the accounting equation approach, all
the accounts are classified into five types and transactions are entered in the
ACADEMY of ACCOUNTS
books of accounts by applying the following rules : Accounting • Costing • Taxation • Financial Management
(i) Assets : Debit for (+) and Credit for (-) West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
(ii) Expenses / Loss : Debit for (+) and Credit for (-)
(iii) Liabilities : Credit for (+) and Debit for (-)
(iv) Captial : Credit for (+) and Debit for (-) Invoice / Bill / Cash Memo
(v) Income / Revenues : Credit for (+) and Debit for (-) Accurate Watch Co.
135, West Patel Nagar, New Delhi-110008.
Account No: 152 Date : 18.05.2016
An account is a record of all business transactions relating to a particular person or
asset or liability or expense or income. In accounting, we keep a separate record
Name & address of the Customer : XYZ Enterprises,
of each individual, asset, liability, expense or income. The place where such a
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record is maintained is termed as an ‘Account’. 181, East Patel Nagar,
All accounts are divided into two sides. The left hand side of an account is called New Delhi-110008.
Debit side and the right hand side of an account is called Credit side.
S.No. Description RateRs. Qty. Amount
Ledger 1. Titan Regulia 1,800 3 5,400
A Ledger is a book which contains all the accounts whether personal, real or 2. Titan Raga 1,200 2 2,400
nominal, which are first entered in journal or special purpose subsidiary books. 7,800
According to L.C. Cropper, ‘the book which contains a classified and permanent Less: Discount 10% (-)780
record of all the transactions of a business is called the Ledger’.
Total 7,020
The ledger that is normally used in a majority of business concern is a bound note
Terms : Goods once sold are not taken back.
book. This can be preserved for a long time. Its pages are consequently numbered.
Each account in the ledger is opened preferably on a separate page. If one page E&OE
is completed, the account will be continued in the next or some other page. But in Authorised signatory
bigger concerns, where it is not practical to keep the ledger as a bound note book, for Accurate Watch Co.
Loose-leaf ledger are prepared in place of a bound note book. In a loose-leaf
ledger, appropriate ruled sheets of thick paper are introduced and fixed up with the
help of a binder. Whenever necessary additional pages may be inserted, completed (2) Receipt : When a trader receives cash from a customer, he issues a receipt
accounts can be removed and the accounts may be arranged and rearranged in containing the date, the amount and the name of the customer. The original
the desired order. This type of ledger is known as Loose-leaf Ledger. copy is handed over to the customer and the duplicate copy is kept for record.
In the same way, whenever we make payment, we obtain a receipt from the
party to whom we make payment.
Utility of Ledger
Ledger is a principal or main book which contains all the accounts in which the
transactions recorded in the books of original entry are transferred. Ledger is also
called the ‘Book of Final Entry’ or ‘Book of Secondary Entry’, because the
RECEIPT CA. Naresh Aggarwal’s

CHAPTER - 4
Accurate Watch Co. ACADEMY ofProcedures
Accounting ACCOUNTS
135, West Patel Nagar, New Delhi-110008. Accounting • Costing • Taxation • Financial Management
No: 192 Date : 18.05.2016 West Patel Nagar, New Delhi. Ph:8800215448.
After identifying the business transactionsWebsite:
from thewww.academyofaccounts.org
source document the next
Received with thanks a sum of Rs.15,000 (Rupees fifteen thousand function of accounting is to keep a systematic record of all business transactions.
only) from M/s ABC & Co. being the supply of watches as per the list All these transactions are recorded in an orderly manner, soon after their occurrence
enclosed. in the journal or subsidiary books.
Cheque/DD/No. : 210345 The books in which a transaction is recorded for the first time from a source document
Dated : 10.05.2016 are called Books of Original Entry or Prime Entry. Journal is one of the books of
Bank Name : HDFC Bank, East Patel Nagar original entry in which transactions are originally recorded in a chronological (day-
Revenue to-day) order according to the principles of Double Entry System.
Stamp
Manager Journal Entries

for Accurate Watch Co. Journal entries are the first step in the accounting cycle and are used to record all
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business transactions and events in the accounting system. As business events
(3) Debit Note : A debit note is prepared by the buyer and it contains the date of of occur throughout the accounting period, journal entries are recorded in the journal
the goods returned, name of the supplier, details of the goods returned and book to show how the event changed in the finacial position of the business.
reasons for returning the goods. Each debit note is serially numbered. A Journal is a date-wise record of all the transactions with details of the accounts
duplicate copy or counter foil of the debit note is retained by the buyer. On the debited and credited and the amount of each transaction. In the Journal, each
basis of debit note, the suppliers account is debited in the books. transaction is dealt with separately. Journal entries use debits and credits to record
the changes of the finacial position in the journal. There are two different ways to
learn the effects of debits and credits on accounts in the double entry system of
book keeping. They are (i) Traditional Approach, and (ii) Accounting Equation
Approach. Irrespective of the approach used, the effect on the books of accounts
remains the same.
(1) Traditional approach : Following the traditional approach accounts are
classified as real, personal, and nominal accounts. Real accounts are accounts
relating to physical assets. Personal accounts are accounts relating to persons
or organisations with whom the business has transactions and will mainly consist
of accounts of proprietor, debtors and creditors. Nominal accounts relate with
revenue, expenses, gains, and losses. Transactions are entered in the books of
accounts by applying the following golden rules of accounting :
(i) Real account : Debit what comes in and credit what goes out
(ii) Personal account : Debit the receiver and credit the giver
(4) Credit Note : A credit note is prepared by the seller and it contains the date on
which goods are returned, name of the customer, details of the goods received (iii) Nominal account : Debit all expenses & losses and credit all incomes &
back, amount of such goods and reasons for returning the goods. Each credit gains
note is serially numbered. A duplicate copy of the credit note is retained for the (2) American approach or Accounting equation approach : Under this
record purpose. On the basis of credit note, the customer’s account is credited approach transactions are recorded based on the accounting equation, i.e.,
in the books.

ACADEMY of ACCOUNTS
(II) Non Cash Vouchers (Transfer Vouchers) : Non Cash Vouchers are vouchers
prepared for the transitions that do not involve cash. For example, credit sales,
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credit purchase, sales return etc. The content of a Non Cash Vouchers are as
follows :
(5) Pay-in-slip : Pay-in-slip is a form available in banks and is used to deposit
(1) Name and address of entity (6) Net amount of transaction money into a bank account. Each pay-in-slip has a counterfoil which is returned
(2) Voucher Number (7) Narration (a brief description)
to the depositor duly sealed and signed by the bank official. This source
(3) Date of Preparing Voucher (8) Supporting voucher number
document relates to bank transactions. It gives details regarding date, account
(4) Name of A/c to be Debited (9) Signature of the preparer
number, amount deposited (in cash or cheque) and name of the account
(5) Name of A/c to be Credited (10) Signature of authorized signatory
. redloh
(6) Cheque : A cheque is a document in writing drawn upon a specified banker to

pay a specified sum to the bearer or the person named in it and payable on
demand. Each cheque book has a counterfoil in which the same details in the
cheque are filled. The counterfoil remains with the account holder for his future
reference. The counterfoil forms the source document for entries to be made in
the books of accounts.

ACADEMY of ACCOUNTS
(I) Cash Vouchers : Cash Vouchers are vouchers that are prepared at the time of
receipt or payment of cash. Cash Vouchers are of two types:
(i) Credit Vouchers : Credit Vouchers are vouchers that are prepared at the
time when cash is received. For example when goods sold for cash, sale
of investments, cash collected from customer etc. The content of a Credit
Vouchers are as follows :
(7) Vouchers : The documents prepared for the purpose of recording business
(1) Name and address of entity (6) Narration (a brief description)
transactions in the books of accounts are known as vouchers. Voucher is prepared
(2) Voucher Number (7) Supporting voucher number
on the basis of source documents. For recording business transactions in the
books of accounts, source documents are further analyzed and conclusion is drawn
(3) Date of Preparing Voucher (8) Signature of the preparer
as to which account is to be debited and which account is to be credited. The (4) Name of A/c to be Credited (9) Signature of authorized signatory
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document on which this conclusion is written is known as voucher or accounting (5) Net amount of transaction
voucher.
Features of Voucher
(i) It is a document.
(ii) It is prepared by analyzing the source documents.
(iii) It contains decision regarding the accounts to be debited and credited.
(iv) It helps in recording an accounting entry in the books of accounts.
(v) It is prepared and signed by the accountant and is also countersigned by the
authorized signatory of the business enterprise.
Preparation of Vouchers
Business transactions in the books of accounts are available in the source
documents. These documents are further analysed and conclusion is to be drawn
about which account is to be debited and which account is to be credited. After
deciding the head of accounts to be debited and credited, vouchers are prepared.
Usually, blank forms are readily available in the printed form in the market.
(ii) Debit Vouchers : Debit Vouchers are vouchers that are prepared when
Accounting Vouchers are broadly of two types cash is paid. Payment may be on account of expenses, purchases, drawing
I. Cash Voucher II. Non Cash Voucher of the proprietor, payment to creditor etc. The content of a Debit Vouchers
are as follows :
Types of Vouchers (1) Name and address of entity (6) Narration (a brief description)
(2) Voucher Number (7) Supporting voucher number
(3) Date of Preparing Voucher (8) Signature of the preparer
Cash Voucher Non Cash Voucher (4) Name of A/c to be Credited (9) Signature of authorized signatory
(Transfer Voucher) (5) Net amount of transaction (10) Receipt (Optional)
Debit Voucher Credit Voucher

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Print Instructions CA.

CA. Naresh Aggarwal’s

called ‘Suspense Account’. Suspense account is prepared to avoid the delay in

Relationship between Accountancy, Accounting and Book-keeping

date of issuing the only on the date on which they

CA. Naresh Aggarwal’s

CHAPTER - 5 ACADEMY of ACCOUNTS

Imprest System of Petty Cash Book

publish in public interest, standards to be observed in the presentation of audited

Advantages of Cash Book

Kinds of Cash Book

(5) Net effect The final position of a The final position of a

(iii) The journal becomes bulky and voluminous.

Use of Subsidiary Books Personal Impersonal

Transactions can be classified and grouped conveniently according to their nature,

‘Assets = Liabilities + Capital’. The accounting equation is a statement of equality

RECEIPT CA. Naresh Aggarwal’s

Manager Journal Entries

CA. Naresh Aggarwal’s

(6) Cheque : A cheque is a document in writing drawn upon a specified banker to

CA. Naresh Aggarwal’s

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